The volume and value of deals in the the UK lower mid-market completed in the first three quarters of this year has increased year on year for the past three years.

According to Lyceum Capital and Cass Business School’s UK Growth Buyout Dashboard, a quarterly analysis of UK-headquartered private equity deals in the £10m (€11.6m) to £100m segment, 63 transactions were completed between January and the end of September this year, compared with 50 investments in the same period in 2010 and just 25 in the first nine months of 2009.

During the third quarter of this year, deal volume was higher than in the previous quarter. The combined value of those deals fell slightly – from £794m to £785m – but both volume and value of deals was still higher than the same quarter of 2010.

The drop in total deal value in the third quarter signals fewer large deal opportunities while the lower mid-market enjoys a steady inflow of new businesses seeking private equity investment.

Management buyouts and secondary buyouts were the most common types of transaction, however the number of MBOs completed in Q3 2011 fell to nine from 12 recorded in the same quarter last year.

There were nine secondary buyouts recorded in the most recent quarter, the highest number of any quarter during the last two years. Trade buyers were also prevalent in the quarter, with six companies exited to corporates, higher than the previous two quarters but lower than the eight recorded in Q3 2010.

There were two take-privates in the last quarter compared to only one in the previous two quarters.

No IPOs were recorded, continuing the trend that kicked off back at the start of 2010, and is unsurprising considering the unstable capital markets.

TMT businesses continued to dominate the lower mid-market with eight out of 22 deals this quarter and five transactions in business support services.

Retail saw three deals or more completed in every quarter since the second quarter in 2010.

This performance of the UK lower-mid market in the third quarter is in distinct contrast to the overall market when much larger deals of £100m plus are considered. That market has declined during the past two quarters and some reports show it declining dramatically in Q3 – Bloomberg, for example, this week reported a 43 per cent decline in deals with European purchasers for the overall market. Therefore, the volume of deals in the lower mid-market is encouraging in this difficult economic environment, and may prove in the next quarter to continue to be resilient. There is further evidence in our figures of a positive shift in the market with a strong mix of industries, including healthcare, which was absent last quarter and a resurgence in technology deals.

The March budget provided many interesting announcements relevant to Rockworth clients.  The rate of income tax relief available to investors under the Enterprise Investment Scheme will go up from 20% to 30% and the annual investment allowed will increase from £500k to £1m (as of 2012). Coupled with the existing exemption from Capital Gains Tax after 3 yrs and Business property relief—we see this as a very strong source of potential investment for private businesses. The Entrepreneurs Relief will double from £5m to £10m as of 6 April 2011; this figure representing the life-time capital gains allowance where Capital Gains Tax is limited to 10%.  Coupled with a reduction in the main rate of corporation tax, extension of R&D tax credits and creation of an additional 50,000 apprenticeships means there is plenty to consider for private companies that may or may not be considering M&A in 2011.

Multiples for good quality private companies involved in UK M&A deals increased in 2010 and are likely to continue to rise this year, driven by interest from both trade and private equity buyers, various research shows.  One survey suggests Private equity firms on average paid 12.2 times multiples for companies in 2010, compared to 11.6 in 2009.  Meanwhile, trade buyers paid an average 11.7 times multiple for private companies last year, up from 11.2.

“Trade and private equity buyers appear to have been gearing up to make further acquisitions over the past few months and improvements in pricing are likely to tempt sellers back into the market,” said Lawrence Price, Director at Rockworth.  “Increasing stability and confidence within buyers’ businesses has meant that in the UK m&a is seen again as a route to growth.  With increased appetite for quality deals multiples are increasing.  Some estimates suggest that in the UK m&a valuations will rise between 10 and 20% this year.

Further evidence comes from Thomson Reuters who report that British companies have more than doubled their dealmaking so far in 2011 to a four-year high of $86bn (£53.6bn).

BP impact on UK M&A statistics

BP’s $9bn investment in oil and gas fields owned by India’s Reliance Industries and Ensco’s $8.6bn takeover of the American firm Pride International, to form an offshore drilling group, are among a slew of significant energy-related deals that have contributed greatly to the surge in mergers and acquisitions between January and the middle of March.

After three years of vastly reduced deal activity, companies have finally begun to spend the cash they hoarded during the downturn, while private equity firms have stepped up takeovers as they rush to meet investment deadlines.

As a result, mergers and acquisitions involving at least one UK party has increased by 164% so far in 2011 from the seven-year low of $32.5bn for the same period last year, when firms hoarded the cash they had, struggled to raise finance to make new acquisitions and held off on selling assets because valuations were low.

“There has been a significant increase in UK M&A activity as the huge number of transactions that have been bottlenecked in the past few years begin to get released,” said Henry Jackson, managing partner of OpCapita, the London-based investment firm previously known as Merchant Equity.

“Banks are more willing to lend and rising asset prices mean companies are happier to sell,” added Jackson, whose previous investments include the MFI retail chain.

UK M&A being driven in part by Private Equity funds maturing

Furthermore, private equity firms, which are typically required to return unspent cash when a fund turns five, are rushing to spend their money after a period of low activity. This is pushing up the volume and value of private equity transactions.

“Financial sponsors [private equity firms] have money burning a hole in their pocket and are being especially aggressive. There are a number of firms that are coming to an end of their investment period and have recently been bidding aggressively. We believe these deals were significantly overpriced as the bidders decided to accept lower returns to get the money out of the door,” Jackson says.

The value of private equity deals in the UK – a subset of the overall UK M&A market – has nearly tripled to $24.6bn this year, compared with the same period in 2010, according to Thomson Reuters.

Advent International’s $1.5bn takeover of the Priory care home and clinics chain and Arcus European Infrastructure’s proposed $1.34bn acquisition of Forth Ports are among the bigger private equity deals reported this year in UK m&a listings, according to Thomson Reuters.

Client Business

The Core was founded in Hull in the early 1990’s by Alistair Whiteley.  Whilst his co-founder left the business, Alistair continued to grow The Core and in 2006 brought Nick Green in as Managing Director.  Nick had worked with the team on numerous occasions in his prior role managing various brands within Unilever. Subsequent to Nick’s arrival the profitability of the business grew significantly to c.£800k on turnover of £3m.  The Core’s focus remained with packaging design but has broadened to include more innovation work and as a result they are increasingly involved at an earlier point of the product development lifecycle.  Key clients included Virgin Atlantic, Unilever, Asda and Lloyds Banking Group.

Deal Process

We began working with Nick Green and The Core in 2008, advising on their options to accelerate the growth of the business and make the most of international opportunities.  Whilst our ‘pre-transaction’ involvement lasted considerably longer than anticipated due to the financial crisis, we embarked on active conversation in early 2010 when Ali and Nick decided it would be worth testing the market.

Resulting Transaction

As a result of understanding that Hornall
Anderson, a Seattle based design agency under Omnicom ownership for the previous 5 years, was seeking a European presence, we engaged in more detailed discussions with DAS – Omnicoms holding company for specialist agencies.  These were chosen as preferred bidders and the transaction was completed on 1 October 2010.  Omnicom acquired the whole business with a structured earn-out transaction.

Whilst we continue to celebrate our agency’s history with our longstanding client partners and employees, we are really looking forward to setting sail on this next exciting adventure and being part of DAS and Omnicom. We are honoured to be joining the group –one of the largest and most respected agency networks in the world. Our ambition is to continually improve our business while exploring ways we can mutually benefit from geographic reach, expertise and client base. We will continue to strive to deliver exceptional, relevant work and provide our clients with the high level of personal service they have come to expect. Alastair Whiteley, Creative Director and Founder of Core Design

Dear Lawrence, Thank you for everything you have done for The Core this year. It is a landmark year for our business. Much much appreciated. The future is more than bright.Nick Green, Managing Director of Core Design

Entrepreneurs Relief – the Capital Gains Allowance at a rate of 10% for qualifying shareholders has been extended to £5m.

Capital Gains Allowance – entrepreneurs relief raised to £5m

Whilst the head-line Capital Gains Tax was raised to 28% in the emergency budget leaving an individuals capital gains allowance at £10,100, the coalition government have reduced the negative consequences for business owners and entrepreneurs.  Entrepreneurs Relief, currently chargeable at 10%, has been extended to the first £5m of an individual’s lifetime gain. 

The move is hoped to kick-start the private sector economy by encouraging entrepreneurial investment and restoring dynamism to corporate ownership.  As a result many business owners are considering their options going forward amidst an increased appetite from both domestic and overseas acquirers coupled with the increased capital gains allowance on the sale of shares in private companies.

Whilst there was not a great deal coming out of yesterday’s budget, the one small piece of good news for those involved in M&A was the doubling of the ‘Entrepreneurs Relief’ threshold that applies to uk capital gains tax.  The level has been moved from £1m to £2m, whereby business vendors who have held their shares for longer than 1 year are able to claim the first £2m at a reduced rate of 10%.  Whilst many commentators have been speculating about the possible increase in UK Capital Gains Tax after the election, this was a welcome surprise.

Update: The UK Capital Gains Tax relief for entrepreneurs has been raised again to £5m for each qualifying shareholder.

2010 Budget – Capital Gains Allowance

Background

Vianet PLC was a leading Aim-listed telecoms business offering wireless connectivity and telemetry primarily to the vending market-place.  In December 2008 the Vianet business was acquired by another Aim-listed company, Brulines PLC, with the strategic intent to bring together the two companies operations within the vending and leisure markets.

Opportunity

Following the acquisition it was apparent that one area of the Vianet technology platform, specifically ‘M2M’ machine to machine connectivity was not part of the core strategy and the Vianet management team responsible for this division felt there was an opportunity for a management buyout.

Strategy

As part of the Brulines and Vianet transaction, Rockworth were engaged to assist and advise on the MBO of the Vianet M2M business.  Whilst the overall transaction had a number of features, it was decided that the most productive way forward would be to for the management team to forgo some of their benefits from the Vianet acquisition in order to reduce the level of external financing required.  Two external investors were also located to provide both finance and strategic input.

Resulting Transaction

The resulting transaction saw the successful completion of the management buyout complete on 2 September 2009, since then the business was renamed Arkessa and continues to thrive in its niche, having developed a clearly differentiated service offering to the mobile networks.  Dundas & Wilson LLP worked alongside Rockworth as legal advisors and Brulines were advised by Gordons LLP and Brewin Dolphin.

Highlighted Features of the Transaction

Whilst undertaking the Management Buyout alongside the sale to Brulines added significant complexity to the transaction, the various features allowed a great deal of flexibility in terms of negotiations.  Brulines PLC were specifically interested in certain aspects of the management team’s expertise and as a result of the acquisition had very specific liabilities to individuals involved.  We were therefore able to use each of these features in the context of the overall deal and obtain a result which satisfied the needs of all parties.

I am pleased to confirm that the sale of Vianet’s m2m interests to the management team led Ian Orrock was completed last night. Vianet also retain a small interest in the new business. I’m sure you will join me in wishing the m2m team well in this exciting new phase for them.James Dickson, CEO Brulines PLC

Thank you all for your input, well done on getting this done.
Ian Orrock
CEO Arkessa Limited

Rockworth Management Partners – experienced advisors to technology MBO teams

Rockworth today launches its refreshed website.  We hope you find the various articles, in particular within the Knowledge Bank and Sector areas, interesting.  We would be very interested in receiving any feedback you may have.

Background

Founded in 1984 by husband and wife team, Mike and Helen Illes, MOT Models focussed on the provision of commercial models to photographers, advertisers, designers and production companies primarily in London, but also in continental Europe.  MOT has four commercial divisions – commercial, fashion, junior and character – and generates annual bookings in excess of £4.8m.  The agency has also launched Zone Models, a niche brand providing leading fashion models and representing VIP clients.

Opportunity

As a leading commercial agency, Mike and Helen felt that they were in a very strong position to crystallise the value built up over 25 years of hard work but were uncertain as to where a buyer might be found.

Strategy

The model agency business is not known for its large number of acquisitive groups, and amongst the array of small agencies, MOT was unusual as a well-run successful commercial business – not simply a lifestyle choice for the owners.  We felt that the pre-requisite for any buyer would be financial ability and therefore we chose to focus upon two different sets of synergies.  The first would be market, here concentrating on advertising groups and personality management, and secondly we focussed upon the pure function of the business – from this perspective we were led towards the temporary recruitment sector.

Resulting Transaction

Of the diverse interest shown in the company, we chose to proceed with Vedior NV as the preferred bidder.  Being the third largest recruitment group in the world with a history of acquisitions and a respect for the brands they acquire we felt it would be the perfect home for the business.  The resulting transaction allowed the Illes to sell 75% of their business, all in cash, with Mike remaining for an earn-out period.  Having banked their retirement fund, the couple then worked with Vedior to continue MOT’s growth – significantly enhancing their London presence.

MOT Models is a brand-new sector for us; clearly it operates on a completely different economic cycle to our other business sectors. It is this simple fact that makes it attractive to us.

Highlighted Features of the Transaction

The key aspect this particular transaction illustrates is the idea of the ‘left-field buyer’ – our unique process, relying on senior level direct contacts meant that we were able to unearth a strategic fit that even the eventual buyer admitted he would not have originally seen.  Once the key features had been understood, the experience the acquirer had gained from a great many acquisitions meant they remained calm and proactive through up and downs in the market and process.
 

Had you simply told me this was a model agency, I would not have come to the first meeting.
Colin Reader, Director Vedior NV

Background

Having built up a relationship with the founder and co-owner Naresh Nagrecha, we both investigated the market for potential acquisition opportunities and monitored the prospect of a sale of the business.  In early 2008, it was decided it would be the right time to formally begin the sale process.

Client Business

Rubicon was founded in 1981 with a single brand called Passionade by Naresh Nagrecha and Vish Vikera who had worked together at Unilever in West Africa.  The company was the result of Vish’s gut instinct (excuse the pun) for developing flavours for specialist markets in the UK for exotic fruit juices, and Naresh’s commercial ability developing business with Convenience stores and independent retailers.  By the time of sale Rubicon was available in all major supermarkets with the company producing over 50m litres per year in 2008 from a production facility of 15,000 sqft and warehousing of 18,000sqft.  Sales to end of December 2008 were forecast to be £34m resulting in operating profit of c.£4.5m.

Deal Process

Having monitored the market-place for some time it became apparent that a number of the major players that had been isolated in our preliminary research were actively seeking targets, this included soft drinks brand owners from around the world, food manufacturers and sector specific private equity houses.  With a small number of the more left-field acquirers showing real intent we furnished these parties with sufficient information to put together outline proposals.  We then went to the remaining market, with the more obvious bidders approached last (including Britvic & AG Barr).  This resulted in outline offers being received in early March 2008.  With a number of bidders in a similar range we held a second round of bids.  At this point the personal circumstances of the two vendors changed and they decided that as they were planning to move to India after the transaction they would move the ownership of the business to 4 Jersey based trusts prior to sale.  We therefore went through this process in conjunction with PWC and final bids were taken on 29 April 2008.

Resulting Transaction

After some detailed negotiations, the offer from AG Barr PLC was accepted as the best combination of value, protection of staff and deliverability.  Their advisors NM Rothschild and Deloitte carried out financial due diligence whilst we enlisted the help of PWC transaction services to support the small accountancy firm that had acted as the company’s auditor for many years.  AG Barr had to request shareholder approval as a PLC carrying out a Class 1 transaction representing a value greater than 25% of its market capitalisation.  The sale of Groupe Rubicon for the European region (Middle East and USA were held back) and its UK based production facility was completed on 29 August 2008 for a consideration of £59.8m plus £1.25m for the production facility in South Wales.

The acquisition is a great opportunity for Barr. It is in line with our core strategy of developing our portfolio and increasing the scale of our business through differentiated quality brands, at the same time it strengthens our position in the growing juice drinks category. AG Barr CEO, Roger White